November 22, 2023
Colombian court annuls tax ruling disallowing FTC on interest income Colombian tax residents receive from nonresidents
On 9 November 2023, the Colombian highest tax court (Council of State (CS)) annulled tax ruling 1397, issued on 29 October 2020 by the Colombian Tax Authority (DIAN). Under the annulled tax ruling, interests a Colombian tax-resident creditor received from a foreign debtor were deemed to be Colombian-source income because, based on the DIAN's interpretation, the loan was "economically linked to Colombia" and, therefore, foreign taxes that had been paid could not be claimed as a foreign tax credit (FTC) in Colombia.
The annulled tax ruling grounded its conclusion in caselaw from August 2011. In that case, a Colombian branch lent money to its main office (headquarters) abroad, and the headquarters paid interest in exchange. The taxpayer viewed the interest as foreign-source and, therefore, asserted that it was not taxable in Colombia (at that time, branches were only taxed in Colombia on income from Colombian sources). In the 2011 case, the CS determined that the interest was Colombian-source income; thus it was taxable to the Colombian branch, as the debt transaction was economically linked to the country.1
Based on this 2011 decision, the DIAN concluded in tax ruling 1397 that a loan granted by a tax resident in Colombia to a debtor from abroad that did not have a permanent establishment in Colombia was economically linked to Colombia. Consequently, the interest paid was considered Colombian-source income and the taxes paid abroad could not be claimed as tax credit in Colombia for income tax purposes.
New decision of the Council of State
In the 2023 decision, the CS noted that the 2011 case analyzed a specific situation in which there was a loan between a branch and its home office abroad and in which the DIAN had argued that, under the foreign exchange and investment regulations, the transfer of foreign currency between the branch and its home office was not considered an external debt operation.
The CS then distinguished the facts at issue in tax ruling 1397 from those at issue in the 2011 case, pointing out that tax ruling 1397 involved a resident in Colombia (not a Colombian branch of a nonresident). Due to this factual distinction, the CS annulled the tax ruling.
Due to this decision to annul tax ruling 1397, the interest income that a resident in Colombia receives from a loan made to a nonresident could be treated as foreign-source income, and the taxes (withholdings) paid abroad could be considered a tax credit in Colombia by the creditor resident in the country.
For additional information with respect to this Alert, please contact the following:
Ernst & Young S.A.S. Bogota
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 According to article 24(4) of the Colombian Tax Code (CTC), Colombian-source income includes "interest on debt transactions owned in the country or economically linked to it." Debt transactions held in the country are generally understood to be those in which the debtor is domiciled in the country (see article 265 of the CTC). However, the regulation does not define what is meant by a "credit economically linked to the country."